Quality claims: binding certificate clause not qualified by incorporated standard terms

In the recent case of Septo Trading Inc. v Tintrade Limited  [2021] EWCA Civ 718, the English Court of Appeal considered whether a Buyer was bound by a quality certificate issued at the load port, which the parties had agreed to be "binding on parties save fraud or manifest error." The answer to this question turned on the interaction between the bespoke Recap terms of a sale contract with a set of standard terms incorporated into the contract.

Written by Eleanor Coates and Anna Fomina

Facts

The dispute arose between the Buyer and the Seller under a contract for the sale/purchase of a cargo of fuel oil ("the Contract"), which was loaded aboard the vessel "NOUNOU" in July 2018. The Contract, evidenced by a "Recap", described the fuel oil as "high-sulphur fuel oil RMG 380 as per ISO 8217:2010" ("the Cargo").

The Recap contained a "Determination of Quality and Quantity" clause ("the Quality Clause") which provided that:

"As ascertained at loadport by mutually acceptable first class independent inspector, or as ascertained by loadport authorities and witnessed by first class independent inspector (as per local practice at time of loading). Such result to be binding on parties save fraud or manifest error...."

The Recap further provided that:

"where not in conflict with the above, BP 2007 General Terms and Conditions for fob sales to apply."

Clause 1.2.1 of the BP 2007 General Terms and Conditions ("BP GTCs") states that:

"Provided always the certificates of quantity and quality ……. of the Product comprising the shipment are issued in accordance with sections 1.2.2 or 1.2.3 below then they shall, except in cases of manifest error or fraud, be conclusive and binding on both parties for invoicing purposes and the Buyer shall be obliged to make payment in full in accordance with Section 30.1 but without prejudice to the rights of either party to make any claim pursuant to Section 26.”

The Cargo was found to be within contractual specification at the load port and a certificate was issued to that effect ("the Quality Certificate").

Following onward sale by the Buyer, the Cargo was then transferred to another vessel. An analysis conducted at this point revealed that the Cargo significantly exceeded, and therefore breached, the contractual specification in relation to its Total Sediment Potential.

Court Proceedings

The Buyer brought a claim in the English High Court for damages for losses suffered as a result of the Cargo being off specification. The principal issue before the Court was whether the Quality Certificate was intended to be conclusive and binding under the Quality clause of the Recap – meaning that the Buyer was prevented from bringing its claim based on the actual quality of the product – or binding for invoicing purposes only under the BP GTCs. In the latter case, the Buyer could submit evidence challenging the Quality Certificate. This question, in turn, depended upon whether the BP GTCs were "in conflict" with the Quality Clause of the Recap and, therefore, whether or not they formed part of the Contract.

High Court Proceedings

The Judge at first instance found in favour of the Buyer. The Court held that the quality provisions of the BP GTCs and the Recap clause were not in conflict and could sensibly be read together, giving effect to them both in a manner which was consistent with commercial common sense. The Court stressed that bespoke documents such as the Recap commonly contain wide and absolute provisions which are subject to qualification by other later provisions; this does not make the later provisions inconsistent. The result of this reading was that Clause 1.2.1 of the BP GTCs qualified the Quality Clause and the Quality Certificate was binding for invoicing and payment purposes only. The Court upheld the Buyer’s quality claim and awarded damages of some USD 3 million.

Court of Appeal Proceedings

The Seller appealed, arguing that clause 1.2.1 of the BP GTCs was in conflict with the Quality Clause in the Recap and, as such, should not be given effect. The Court of Appeal agreed and allowed the appeal.

The Court of Appeal highlighted that the task of the court is to establish whether the special condition of the contract can be read together with the standard terms. If they cannot, then this means that there is an inconsistency and the special condition is to prevail over the standard clauses. The Court of Appeal stressed that the question of whether there is an inconsistency must be “approached practically, having regard to business common sense” and clarified that there will be an inconsistency if the standard term effectively deprives the special term of any effect.  

The Court of Appeal then provided useful guidance on how to approach inconsistencies between bespoke and standard form clauses and outlined a three-stage approach.

The first step is to ascertain the true meaning of the bespoke term in isolation, which could then be tested against other clauses in the contract. In the event, the Judge at first instance was correct to conclude that the effect of the Recap term alone was to make the Quality Certificate binding for all purposes.

The next step is to consider the meaning and effect of the printed or standard term, which, on the facts, was to make the Quality Certificate binding for invoicing and payment purposes only and without prejudice to the Buyer’s rights to make a quality claim. In effect, this meant that the Quality Certificate was not binding at all. 

The third and final step is to consider any potential inconsistency between the two. On the facts, the Court held that clause 1.2.1 of the BP GTCs was fundamentally in conflict with the Recap term. The two provisions could not be fairly or sensibly read together; the printed term does not “merely qualify or supplement the Recap term, but rather deprives it of all practical effect”.

As such, the Court held that effect must be given to the bespoke Recap clause, where on its true construction and intention, the Quality Certificate issued in the loading port is binding.

Comment

This judgment highlights that where a set of standard terms incorporated into a contract conflicts with specially negotiated terms, the standard terms may not be given any effect.  A thorough review and understanding of the standard terms being incorporated is essential to ensure that the contract accurately reflects the parties' intentions and to avoid uncertainty.